financial solutions for risk management - world...
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Financial Solutions for RiskManagementSovereign Debt Management ForumWashington DC – October 20, 2016
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC 2
Uninsured losses from natural catastrophes area growing burden for governmentsNatural catastrophe losses 1970 – 2016 (in 2016 USD billion)
Source: Swiss Re Economic Research & Consulting and Cat Perils.
0
50
100
150
200
250
300
350
400
450
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Uninsured losses (nat-cat)Insured losses (nat-cat)10-year moving average insured losses10-year moving average total economic losses
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC
First twelve months of financial crisis cost USD 650 billion, but theglobal risk landscape reveals other equally costly scenarios:
Pensions: US pensionsunderfunded by USD 1 trillion
Pandemics: Average annualcost of flu pandemic outbreak
estimated at $60bn a year
Disasters: Miami hurricanecould cause up to USD 500billion in economic losses
Economic
Environmental
Geopolitical
Societal
Technological
Risk categories:
Source: Global Risk Report 2016, 11th Edition,World Economic Forum, January 2016
Beyond natural catastrophes….
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC
Fiscal: S&P calculates potential sovereign rating impact ofnatural catastrophes
0 0.5 1 1.5 2 2.5 3
Dominican Republic…Chile EQ
Bangladesh TCJapan EQ
Vietnam TCPeru EQ
Thailand FLTurkey EQ
Philippines EQDominican Republic…
Italy EQMexico EQ
Hungary FLIsrael EQ
Colombia EQNew Zealand EQ
Indonesia EQPortugal EQPakistan EQ
Philippines TCAustria EQMexico TCGreece EQ
Hypothetical rating downgrade in notches
Net rating impact (select cases with more than 1/4 notch impact)
FloodTropical CycloneEarthquake
Source: Swiss Re, Standard & Poor's calculations. © Standard & Poor's 2015.
S&P states:
“…natural disasters (earthquakes, tropicalstorms, floods, and winter storms), which can beexpected once in every 250 years, can weakensovereign ratings”.
“Insurance coverage can act as a mitigant”
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC 5
Monetary: Potential Inflation Impacts of Natural Disasters
• Natural disasters have asignificant impact oninflation
• Impact is muted foradvanced economies withexception of largest 25%of events
• Impact material in shortterm, particularly for sub-indices, but moreambiguous in mediumterm
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC 6
Case study Uruguay: Largest Transaction to ProtectAgainst Drought and Energy Price Risk
Solution features Insured peril: Drought & energy prices Use of proceeds: Purchase of energy when
drought conditions cause lack of hydro power Transaction Size: USD 450m Client: UTE (state-owned power company) Arranger: World Bank Treasury Key Takeaways:
1. Contingent liabilities can be insured forfixed costs
2. Combination of both exogenous shock +commodity risk
3. “Insurance” rewards for improved riskmanagement
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC
Innovative risk transfer solutions for the public sector
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VietnamAgricultureyield cover
Pacific IslandsEarthquake and
tropical cyclone risk
UruguayEnergy production
shortfallsdue to drought
IndiaWeather insurance
for farmers
CaribbeanHurricane,
earthquake andexcess rainfall risk
BeijingAgricultural risk
TurkeyEarthquake pool Bangladesh
Floodinsurance
African Risk CapacityGovernment drought
insurance pool
FloridaHurricane risk
United KingdomFlood risk
GuangdongTyphoon/rainfallThailand
Crop insurance
MexicoEarthquake/hurricane
and livestock risk
LouisianaHurricane risk
HeilongjiangMultiperil disaster
risk
KenyaLivestock insurance
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Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC
Legal notice
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